Highlights

Also on KPMG.com

The Advocate General’s (AG) Opinion has been released in this reference from Germany, concerning the time at which the right to deduct input VAT arises when an invoice was incomplete at the time of its issue and was later corrected. During an inspection, the tax authorities found that the invoices in question did not contain the supplier’s tax or VAT number and assessed the recipient for the input tax it had claimed on its VAT return. The taxpayer and the supplier corrected the invoices to include the required details. The tax authorities still assessed for the historic periods, arguing that the right to deduct only arose at the point in time when the invoices were corrected. The AG was of the Opinion that the right to deduct arises when the original invoices were received.

The AG began by recalling the fundamental principles of the taxpayer’s right to deduct input tax. Turning to the rules governing the right of deduction (Article 178), the taxable person must hold an invoice in accordance with Article 226, which must include a VAT number. However, the AG noted that these have been described as formal conditions. They are not conditions that must be met in order for the right to deduct VAT to arise, but they do allow the tax authorities to have all the information necessary to collect VAT and to exercise their supervision in order to prevent evasion.

Having appeared to have concluded that there was a right to deduct, the AG focused on the time at which a right to deduct input tax arose. The AG was of the opinion that the right arose in the older period when the original invoice was created. The AG supported its view by noting:

The immediate character of the right to deduction is intended to ensure the neutrality of the common system of VAT.

The later date would be contrary to the right being immediate and would create a financial risk of interest for the taxpayer, even though the tax authority revenue would be the same.

The Court has ruled on several occasions that the principle of VAT neutrality requires deduction of input tax, if the substantive requirements are satisfied, even if the taxable person has failed to comply with some of the formal requirements. This is all the more relevant in this case where the issue was rectified by the taxable person.

The reference itself referred to a number of ECJ cases including Terra Baubedarf-Handel (C-152/02). However, the AG distinguished this case on the basis that Senatex, unlike Terra Baubedarf-Handel, possessed invoices when it exercised its right of deduction and had paid input VAT.

The AG did note the importance of VAT numbers, observing that Member States have the ability to impose penalties for non-compliance. The German Tax Authority argued that its treatment replaced a penalty, but the AG disagreed. Finally, the AG considered time limits for correcting invoices. The AG was of the opinion that setting a time limit precluding adjustment after a decision by the tax authorities may seem excessive, rendering it impossible in practice or excessively difficult to exercise that right. Many such issues with invoices are identified during inspections by the tax authorities. Otherwise, the AG was of the opinion that it is for the Member State to adopt such time limits and to ensure that such measures comply with the principles of equivalence and effectiveness. To access the Opinion click here.